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Currency appreciation, a positive?

India had been witnessing depreciation in rupee (INR) as compared to the dollar (US$) since 1990s. On an average basis, it had depreciated historically at a rate of about 5% every year. However, since last one year, a reversal in trend is being witnessed. Rupee has appreciated by about 6% in this period. This movement in exchange rates tends to have some effect on the revenues and earnings of various sectors. Let's take a look at some of the key sectors, which are affected by the currency exchange rates.

Energy is a major sector, which is impacted by currency movements. India depends on imports for about 70% of its crude oil requirements. Petroleum products account for about 28% of India's total imports, crude oil being a major component of this. Any depreciation of rupee leads to increased crude oil purchase price, which increases the expenses for the companies (HPCL, BPCL, IOC) in this sector. However, the current appreciation in the rupee seems to have benefited these players, as they are getting crude at lower effective prices.

Top 5 importers

FY02*

Petroleum & products

27.4%

Capital goods

18.2%

Pearls, precious stones

9.0%

Edible oils

2.7%

Iron and steel

1.6%

* provisional, Source: Statistical Outline

Let's take a simple example. Consider that the currency rate last year was Rs 49 per US$. The crude imports were about 81.2 m tonnes. Crude prices were at US$ 27 per barrel. Now one year later, suppose we assume that the crude prices are at the same levels and the rupee has appreciated by about 6%, then as per our calculations, savings are about Rs 45.3 bn just on account of appreciation of rupee, other things remaining the same. The case in point, the prices of petrol and diesel were reduced recently to pass the benefit the companies got as a result of the appreciation in the rupee. Power, automobiles and fertilizer industries, being major dependents on petroleum products for their feedstock, are also likely to benefit as a result of this appreciation in the rupee.

Top 5 exporters

FY02*

Textiles

22.0%

Handicrafts

19.2%

Engineering goods

15.8%

Chemicals

13.7%

Agriculture

13.4%

* provisional, Source: Statistical Outline

However, one negative impact of the appreciation is on the exports front, as they become uncompetitive. Software sector is the best case, which is adversely impacted by this appreciation in rupee. Indian software companies, that are already facing pressure of declining billing rates, are also witnessing their margins and profitability decline due to rupee appreciation. This is because of the fact that while a major part of their revenues is in US dollar terms (as exports form a major source of their revenues), the costs incurred are in rupee terms, as most of the work is done offshore (in India).

However, higher growth in export volumes has negated the impact of reduced earnings. Higher export volumes further reiterates the fact about India's global competitiveness due to its cost efficiency. This apart, India, being a net importer (FY02 net imports were about Rs 359 bn), has benefited as a result of this appreciation in Indian rupee.

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